Activity-Based

Costing
A Tool to Aid Decision Making
Activity-Based Costing (ABC):
A costing method based on activities
Assign the
cost of
Activities activities to Products that
Allocated to demanding the
that cause
Overhead costs the activities
overhead
Activity measure (cost driver)
is an allocation base.
 EX:
Activity Cost Pool Activity Measure (cost driver)
Customer orders Number of customer orders
Product design Number of product designs
Order size Machine-hours
Customer relations Number of active customers
Other Not applicable
Other:
These costs mainly consists of:
Organization-sustaining costs, and
Costs of idle capacity (Unused capacity).
These costs will not be assigned to products
because they represent resources that are not
consumed by products.
EX(1)
2) Hast y Hardwood Floors installs oak and other hardwood floors in
homes and businesses. The company uses an activity-based costing
system for its overhead costs. The company has provided the following
data concerning its annual overhead costs and its activity based
costing system:

The "Other" activity cost pool consists of the costs of

idle capacity and organization-sustaining costs.
The amount of activity for the year is as follows:
A "square" is a measure of area that is roughly equivalent
to 1,000 square feet.
Required:
a) Prepare the first-stage allocation of overhead costs to
the activity cost pools.
b) Compute the activity rates (i.e., cost per unit of activity)
for the Installing Floors and Job Support activity cost
pools.
c)Compute the overhead cost, according to the activity-
based costing system, of a job that involves installing 3.4
squares.
3) Phoenix Company makes custom covers for air
conditioning units for homes and businesses. The
company uses an activity-based costing system for its
overhead costs. The company has provided the following
data concerning its annual overhead costs and its activity
cost pools:
The "Other" activity cost pool consists of the costs of idle
capacity and organization-sustaining costs.
The amount of activity for the year is as follows:

Required:
a. Prepare the first-stage allocation of overhead costs to the activity
cost pools.
b. Compute the activity rates (i.e., cost per unit of activity) for the
Making Awnings and Job Support activity cost pools
c. Prepare an action analysis report in good form of a job that
involves making 50 yards of covers and has direct materials and
direct labor cost of $1,500. The sales revenue from this job is $2,500.